The Maryland public employee pension fund spent over half a billion dollars on Wall Street fees during the most recent fiscal year, according to an analysis just released by the Maryland Public Policy Institute. Previously undisclosed “performance fees” paid to Wall Street private equity and hedge funds totaled $251 million in 2015. These fees are equivalent to all the revenue that the state collected from the lottery and casino industry. Furthermore, last year, for every $1 in investment income (net of fees), the Fund spent 50 cents on Wall Street fees.

These conclusions from the Maryland Public Policy Institute (MPPI) are contained in the latest study in a series on Maryland’s pensions prepared by Jeff Hooke. Previous MPPI pension reports have received extensive national media attention, with Jeff Hooke quoted in The New York Times, Wall Street Journal, Bloomberg News, and other publications. None of MPPI’s previous findings on the state’s pensions have been contradicted by either state officials or the Wall Street community.

Hooke has also testified before the Maryland legislature about the Fund’s excessive fees and below-average returns. Yet despite testimony asking the legislature to shift to lower fee investments, the Fund has actually allocated a higher proportion of its assets to high-fee investments.

While last’s year’s proportion of fees to investment income (net of fees) was particularly dismal, the trend over the past five years is not much better. Hooke estimates that the Fund’s fees represented about 11% of its investment income. Even as Maryland was paying more in fees to investment managers, the pension fund’s performance lagged below that of comparable jurisdictions for both the past five and 10 years.

The marketing pitch for these alternative asset managers tries to justify the costs because their funds’ investments will outperform conventional investments. Better returns are necessary to justify the higher fees generated by these so-called “alternative investments,” often 5–15 times the fees charged by active managers of conventional investments. Also troubling is the lack of transparency about the performance fees paid. Hedge fund and private equity fund “performance fees” were $251 million in 2015, according to Hooke’s estimates.

Hooke estimates that if the state pension fund matched its peer group and had it been indexed with a blend of stocks and bonds (over the last 10 years), the unfunded liability of the Fund would be $5 billion less. Hooke notes that U.S. public equity has outperformed private equity over the last 15 years, and that an equity/fixed income blend beats most hedge funds. He argues that using public stock and bond indexing is preferable. Fees for indexing or “passive” investing are less than 2% of those charged by hedge fund and private equity managers. (That’s no typo,“alternative investment” management costs 50–80 times more than indexing.)

While paying excessive fees to investment management vendors would be troubling under any circumstance, it is especially disturbing in light of Maryland’s $20 billion public employee pension shortfall. Money lost to high fees and underperformance makes it less likely that returns will be able to match actuarial requirements. As a result public employees and Maryland taxpayers will have to make up the difference.